[X] QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly
period ended: June 30, 2018

or

[ ] TRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition
period from __________ to __________

Commission file
number 33-20111

SPYR,
INC.

(Exact
name of registrant as specified in its charter)

Nevada

75-2636283

(State or other jurisdiction
of incorporation or organization)

(IRS Employer Identification
No.)

4643 S. Ulster
St., Suite 1510, Denver, CO 80237

(Address of principal
executive offices)

(303) 991-8000

(Registrant's telephone
number)

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days
☒ Yes ☐ No

Indicate by
check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of "large accelerated filer," "accelerated filer" and" smaller reporting company" in Rule 12b-2 of
the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☒

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

APPLICABLE ONLY
TO CORPORATE ISSUERS

As of August 14,
2018, there were 198,145,066 shares of the Registrant's common stock, par value $0.0001, issued, 107,636 shares of Series A Convertible
preferred stock (convertible to 26,909,028 common shares), par value $0.0001, and 20,000 shares of Series E Convertible preferred
stock (convertible to 526,316 common shares), par value $0.0001.

1

PART I - FINANCIAL
INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

SPYR, INC.,
AND SUBSIDIARIES

CONDENSED
CONSOLIDATED BALANCE SHEETS

(Unaudited)

June
30,
2018

December
31,
2017

ASSETS

(Restated)

Current
Assets:

Cash
and cash equivalents

$

168,000

$

86,000

Accounts
receivable, net

18,000

4,000

Prepaid
expenses

26,000

35,000

Trading
securities, at market value

19,000

48,000

Total
Current Assets

231,000

173,000

Property
and equipment, net

113,000

134,000

Capitalized
gaming assets and licensing rights, net

709,000

743,000

Intangible
assets, net

10,000

12,000

Other
assets

6,000

16,000

TOTAL
ASSETS

$

1,069,000

$

1,078,000

LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)

LIABILITIES

Current
Liabilities:

Accounts
payable and accrued liabilities

$

552,000

$

528,000

Related
party short-term advances

55,000

—

Related
party line of credit

1,036,000

—

Convertible
note payable, net

196,000

Litigation
settlement liability

1,983,000

1,983,000

Current
liabilities of discontinued operations

22,000

22,000

Total
Current Liabilities

3,844,000

2,533,000

Non-current
related party line of credit

—

807,000

Total
Liabilities

3,844,000

3,340,000

COMMITMENTS
AND CONTINGENCIES

STOCKHOLDERS’
EQUITY (DEFICIT)

Preferred
stock, $0.0001 par value, 10,000,000 shares authorized

107,636
Class A shares issued and outstanding

as
of June 30, 2018 and December 31, 2017

11

11

20,000
Class E shares issued and outstanding

as
of June 30, 2018 and December 31, 2017

2

2

Common
Stock, $0.0001 par value, 750,000,000 shares authorized

194,041,732
and 181,128,950 shares issued and outstanding

as
of June 30, 2018 and December 31, 2017

19,404

18,112

Additional
paid-in capital

51,062,583

46,561,875

Accumulated
deficit

(53,857,000

)

(48,842,000

)

Total
Stockholders’ Equity ( Deficit)

(2,775,000

)

(2,262,000

)

TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

$

1,069,000

$

1,078,000

The
accompanying notes are an integral part of these condensed consolidated financial statements.

2

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

For
the Three Months Ended
June 30,

For
the Six Months Ended
June 30,

2018

2017

2018

2017

Revenues

$

21,000

$

32,000

$

27,000

$

84,000

Expenses

Labor and related expenses

235,000

308,000

1,121,000

1,678,000

Rent

39,000

49,000

88,000

87,000

Depreciation and amortization

28,000

30,000

57,000

45,000

Professional fees

518,000

1,300,000

3,074,000

2,892,000

Research and development

154,000

152,000

453,000

265,000

Other general and administrative

122,000

369,000

227,000

703,000

Total
Operating Expenses

1,096,000

2,208,000

5,020,000

5,670,000

Operating
Loss

(1,075,000

)

(2,176,000

)

(4,993,000

)

(5,586,000

)

Other Income (Expense)

Interest and dividend income

—

1,000

—

4,000

Interest Expense

(84,000

)

—

(104,000

)

—

Gain on cancellation of shares

113,000

—

113,000

—

Unrealized loss on trading
securities

(18,000

)

(12,000

)

(29,000

)

(27,000

)

Total
Other Expense

11,000

(11,000

)

(20,000

)

(23,000

)

Loss from continuing operations

(1,064,000

)

(2,187,000

)

(5,013,000

)

(5,609,000

)

Loss on discontinued operations

—

(69,000

)

(2,000

)

(104,000

)

Net Loss

$

(1,064,000

)

$

(2,256,000

)

$

(5,015,000

)

$

(5,713,000

)

Per Share Amounts

Loss from continuing operations

Basic and
Diluted earnings per share

$

(0.01

)

$

(0.01

)

$

(0.03

)

$

(0.04

)

Loss on discontinued operations

Basic and
Diluted earnings per share

$

—

$

—

$

—

$

—

Net Loss

Basic and
Diluted earnings per share

$

(0.01

)

$

(0.01

)

$

(0.03

)

$

(0.04

)

Weighted Average Common Shares

Basic and
Diluted

192,569,065

160,846,474

189,479,590

160,321,114

The accompanying notes are an integral
part of these condensed consolidated financial statements.

3

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2018

(Unaudited)

Preferred Stock

Additional

Class A

Class E

Common Stock

Paid-in

Accumulated

Shares

Amount

Shares

Amount

Shares

Amount

Capital

Deficit

Total

Balance at December 31, 2017 (Restated)

107,636

$

11

20,000

$

2

181,128,950

$

18,112

$

46,561,875

$

(48,842,000

)

$

(2,262,000

)

Common stock issued to related party for cash

—

—

—

—

500,000

50

49,950

—

50,000

Common stock issued for cash

—

—

—

—

6,200,000

620

854,380

—

855,000

Fair value of common stock issued for employee compensation

—

—

—

—

1,250,000

125

624,875

—

625,000

Fair value of common stock, options and warrants issued for services

—

—

—

—

5,587,782

559

2,112,441

—

2,113,000

Vesting of options and warrants granted for services

—

—

—

—

—

—

709,000

—

709,000

Common stock cancelled on termination of service agreement

—

—

—

—

(625,000

)

(62

)

(112,938

)

—

(113,000

)

Debt discount on convertible notes payable

—

—

—

—

—

—

263,000

—

263,000

Net loss

—

—

—

—

—

—

—

(5,015,000

)

(5,015,000

)

Balance at June 30, 2018

107,636

$

11

20,000

$

2

194,041,732

$

19,404

$

51,062,583

$

(53,857,000

)

$

(2,775,000

)

The accompanying
notes are an integral part of these condensed consolidated financial statements.

4

SPYR, INC., AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

For the Six Months Ended
June 30,

2018

2017

Cash Flows From Operating Activities:

Net loss for the period

$

(5,015,000

)

$

(5,713,000

)

Adjustments to reconcile net loss to net cash used in operating activities:

Loss on discontinued operations

2,000

104,000

Depreciation and amortization

57,000

45,000

Common stock issued for employee compensation

625,000

847,000

Common stock, options and warrants issued
for services

2,113,000

1,909,000

Vesting of options and warrants granted
for services

709,000

537,000

Gain on cancellation of common stock

(113,000

)

—

Vesting of shares of common stock issued
for services

—

46,000

Debt discount on convertible notes payable

53,000

—

Unrealized loss on trading securities

29,000

27,000

Changes in operating assets and liabilities:

Decrease (increase) in accounts receivables

(14,000

)

10,000

Decrease in other receivables

—

100,000

Decrease (increase) in prepaid expenses

9,000

(44,000

)

Decrease in other assets

10,000

—

Increase in accounts payable and accrued
liabilities

24,000

21,000

Increase in accrued interest on line
of credit - related party

29,000

—

Increase in accrued
interest on convertible notes payable

6,000

—

Net Cash Used in Operating Activities from Continuing Operations

(1,476,000

)

(2,111,000

)

Net Cash Used in Operating Activities from Discontinued
Operations

(2,000

)

(40,000

)

Net Cash Used in Operating Activities

(1,478,000

)

(2,151,000

)

Cash Flows From Investing Activities:

Purchase of licensing
rights

—

(50,000

)

Net Cash (Used in) Provided by Investing Activities

—

(50,000

)

Cash Flows From Financing Activities:

Proceeds from sale of common stock

905,000

300,000

Proceeds from short-term advances -
related party

55,000

—

Proceeds from line of credit - related
party

200,000

—

Proceeds from convertible
notes payable

400,000

—

Net Cash Provided by Financing Activities

1,560,000

300,000

Net Increase (Decrease) in Cash

82,000

(1,901,000

)

Cash and cash equivalents at beginning of period

86,000

3,204,000

Cash and cash equivalents at end of period

$

168,000

$

1,303,000

The accompanying notes are an integral
part of these condensed consolidated financial statements.

The accompanying notes are an integral
part of these condensed consolidated financial statements.

6

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

NOTE 1 - ORGANIZATION AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The accompanying
condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with
GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated
financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the
Company’s Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 filed with the SEC. The condensed consolidated
balance sheet as of December 31, 2017 included herein was derived from the audited consolidated financial statements as of that
date, but does not include all disclosures, including notes, required by GAAP.

In the opinion
of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly
present the Company's financial position and results of operations for the interim periods reflected. Except as noted, all adjustments
contained herein are of a normal recurring nature. Results of operations for the fiscal periods presented herein are not necessarily
indicative of fiscal year-end results.

Organization

The Company was
incorporated as Conceptualistics, Inc. on January 6, 1988 in Delaware. Subsequent to its incorporation, the Company changed its
name to Eat at Joe’s, Ltd. In February 2015, the Company changed its name to SPYR, Inc. and adopted a new ticker symbol
“SPYR” effective March 12, 2015.

Nature of Business

The primary focus
of SPYR, Inc. (the “Company”) is to act as a holding company and develop a portfolio of profitable subsidiaries, not
limited by any particular industry or business.

Through our wholly
owned subsidiary, SPYR APPS, LLC we operate our mobile games and applications business. The focus of the SPYR APPS subsidiary
is the development and publication of our own mobile games as well as the publication of games developed by third-party developers.

Through our other
wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April
2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and
liabilities of EAJ as well as the results of its operations were presented in these financial statements as discontinued operations.

The accompanying
financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and satisfaction of liabilities in the normal course of business, however, the issues described
below raise substantial doubt about the Company’s ability to do so.

As shown in the
accompanying financial statements, for the six months ended June 30, 2018, the Company recorded a net loss from continuing operations
of $5,013,000 and utilized cash in continuing operations of $1,476,000. As of June 30, 2018, our cash balance was
$168,000 and we had trading securities of $19,000. These issues raise substantial doubt about the Company’s ability to continue
as a going concern.

7

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

The Company plans
to expand its mobile games and application development and publishing activities, such as Pocket Starships and Steven Universe:
Tap Together, through acquisition and/or development of its own intellectual property and publishing agreements with developers.

Historically, we
have financed our operations primarily through private sales of our trading securities, through sales of our common stock, and
through related party loans. If our sales goals for our products do not materialize as planned, we believe that the Company can
reduce its operating and product development costs that would allow us to maintain sufficient cash levels to continue operations.
However, if we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital
to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development
plans.

The ability of
the Company to continue as a going concern is dependent upon the success of future capital offerings or alternative financing
arrangements and expansion of its operations. The accompanying financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern. Management is actively pursuing additional sources of
financing sufficient to generate enough cash flow to fund its operations through calendar year 2018. However, management cannot
make any assurances that such financing will be secured.

Use of Estimates

The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates
and assumptions used by management affected impairment analysis for trading securities, fixed assets, intangible assets, capitalized
licensing rights, amounts of potential liabilities, and valuation of issuance of equity securities. Actual results could differ
from those estimates.

Earnings (Loss) Per Share

The Company’s
computation of earnings (loss) per share (EPS) includes basic and diluted EPS. Basic EPS is calculated by dividing the Company’s
net income (loss) available to common stockholders by the weighted average number of common shares during the period. Diluted
EPS reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the
net income (loss) of the Company. In computing diluted EPS, the treasury stock method assumes that outstanding options and warrants
are exercised, and the proceeds are used to purchase common stock at the average market price during the period. Shares of restricted
stock are included in the basic weighted average number of common shares outstanding from the time they vest.

The basic and fully
diluted shares for the six months ended June 30, 2018 are the same because the inclusion of the potential shares (Class A –
26,909,028, Class E – 312,520, Options – 13,740,000, Warrants – 5,300,000) would have had an anti-dilutive effect
due to the Company generating a loss for the six months ended June 30, 2018.

The basic and fully
diluted shares for the three months ended June 30, 2018 are the same because the inclusion of the potential shares (Class A –
26,909,028, Class E – 312,520, Options – 13,740,000, Warrants – 5,300,000) would have had an anti-dilutive effect
due to the Company generating a loss for the three months ended June 30, 2018.

The basic and fully
diluted shares for the six months ended June 30, 2017 are the same because the inclusion of the potential shares (Class A –
26,909,028, Class E – 185,874, Options – 6,120,000, Warrants – 1,200,000) would have had an anti-dilutive effect
due to the Company generating a loss for the six months ended June 30, 2017.

The basic and fully
diluted shares for the three months ended June 30, 2017 are the same because the inclusion of the potential shares (Class A –
26,909,028, Class E – 185,874, Options – 6,120,000, Warrants – 1,200,000) would have had an anti-dilutive effect
due to the Company generating a loss for the three months ended June 30, 2017.

8

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

Capitalized Gaming Assets and
Licensing Rights

Capitalized
gaming assets and licensing rights represent costs to acquire trademarks, copyrights, software, technology, music or other intellectual
property or proprietary rights in the development of our products. Depending upon the agreement with the rights holder, we may
obtain the right to use the intellectual property in multiple products over a number of years, or alternatively, for a single
product.

Significant management
judgments and estimates are utilized in assessing the recoverability of capitalized costs. In evaluating the recoverability of
capitalized costs, the assessment of expected product performance utilizes forecasted sales amounts and estimates of additional
costs to be incurred. If revised forecasted or actual product sales are less than the originally forecasted amounts utilized in
the initial recoverability analysis, the net realizable value may be lower than originally estimated in any given quarter, which
could result in an impairment charge. Material differences may result in the amount and timing of expenses for any period if management
makes different judgments or utilizes different estimates in evaluating these qualitative factors.

On October 23,
2017, the Company completed the acquisition of all assets that refer, relate or pertain to the real—time cross-platform
MMO game commonly known and referred to as “Pocket Starships,” including but not limited to all intellectual property,
know how, “urls,” websites, game engines, game store accounts, prior versions, company names and trade names, business
plans, ﬁnancial reports, financial data, employee data, customer lists, forecasts, strategies, and all other business information;
manufacturing or other technical or scientific know-how, speciﬁcations, technical drawings, drawings, artwork, music, diagrams,
schematics, technology, processes, and any other trade secrets, discoveries, ideas, concepts, know-how, techniques, materials,
formulae, compositions, information, data, results, plans, surveys and/or reports of a technical nature; and software programs
(including all forms of code), software documentation, software development kits, game design documents, and formulae related
to the current, future and proposed products and services, including any additions, enhancements or modifications to the foregoing
or derivatives thereof after the date hereof.

As consideration
for the acquisition, the Company issued eight million shares of the Company’s restricted common stock valued at $3,200,000,
options to purchase up to eight million shares of the Company’s restricted common stock valued at $2,452,000 and assumed
liabilities of $210,000 for a total purchase price of $5,862,000. The options are fully vested, exercisable at a price per share
of $0.50 and will expire starting August 31, 2020. The acquisition of “Pocket Starships” was reported as part of capitalized
gaming assets and licensing rights valued at $481,000 based upon discounted cash flows. The difference between purchase price
and the capitalized value was recorded as loss on write down on assets during 4th quarter 2017. The Company amortizes
the capitalized cost on a straight-line basis over an estimated life of seven to ten years.

Further, the options
previously issued pursuant to a purchase option agreement dated June 25, 2016, which provided for the option to purchase up to
three million, seven hundred and fifty thousand shares of Registrant’s common stock, are fully vested and remain in effect
in accordance with the terms of the purchase option agreement.

During 2017, the
Company capitalized $175,000 pursuant to a licensing agreement for the non-exclusive, limited right to incorporate certain intellectual
property (IP) from various STAR TREK television series in to future updates to and expansions of the Pocket Starships game.
The Company estimates that the IP will have an estimated life of 1.6 years, which approximates the term of the license. In addition,
we also acquired the game titled Battlewack: Idle Lords for $100,000, pursuant to settlement with the game owner and developer.
Battlewack: Idle Lords requires additional development before it can be released.

During the three
and six months ended June 30, 2018, the Company recorded amortization expense of $17,000 and $34,000, respectively. As of June
30, 2018 and December 31, 2017, the unamortized capitalized gaming assets and licensing rights amounted to $709,000 and $743,000
respectively.

9

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

Software Development
Costs

Costs incurred
for software development are expensed as incurred. During the six months ended June 30, 2018 and 2017, the Company incurred $453,000
and $265,000 in software development costs paid to independent gaming software developers.

During the three
months ended June 30, 2018 and 2017, the Company incurred $154,000 and $152,000 in software development costs paid to independent
gaming software developers.

Revenue Recognition

In May 2014,
the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that superseded nearly all existing revenue recognition
guidance under prior U.S. GAAP and replace it with a principles-based approach for determining revenue recognition. The core principle
of the standard is the recognition of revenue upon the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services.

We adopted this
new revenue recognition standard along with is related amendments on January 1, 2018 and have updated our accounting policy for
revenue recognition. As expected, at our current level of revenue, the adoption of this new standard did not impact our financial
position or results of operations operating cash flows.

We determine revenue
recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in
the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract;
and (5) recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.

Through our wholly
owned subsidiary SPYR APPS, LLC, d/b/a SPYR GAMES, we develop, publish and co-publish mobile games, and then generate revenue
through those games by way of advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be
downloaded through the app stores maintained by Apple and Google. The Company’s cross platform gaming application, which
can be played on personal computers, Facebook and mobile devices, can be downloaded from the internet and Facebook as well as
through the app stores maintained by Apple, Google and Amazon.

We operate our
games as live services that allow players to play for free. Within these games players can purchase virtual items to enhance their
game-playing experience. Our identified performance obligation is to display the virtual items within the game. Payment is required
at time of purchase and the purchase price is a fixed amount.

Players can purchase
our virtual items through various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google
Play accounts, Facebook local currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable
and relate to non-cancellable contracts that specify our obligations.

For revenue earned
through app stores, players utilize the app store’s local currency-based payments program to purchase virtual items in our
games. For all payment transactions on these app store platforms, the app store remits to us 70% of the price we request to be
charged to the player for each transaction, which represents the transaction price. We recognize revenue net of the amounts retained
by the app stores for platform and payment processing fees.

Recent Accounting Standards

In February 2016,
the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right
of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02
is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified
retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

10

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

In July 2017, the
FASB issued Accounting Standards Update (ASU) No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from
Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round
Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.(“ASU
2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument
is considered indexed to the entity’s own stock. As a result, financial instruments with down round features are no longer
classified as liabilities and embedded conversion options with down round features are no longer bifurcated. For equity-classified
freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered,
as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible
instruments with embedded conversion options that have down round features, an entity will recognize the intrinsic value of the
feature only when the feature becomes beneficial. The guidance in ASU 2017-11 is effective for fiscal years beginning after December
15, 2018, and interim periods within those fiscal years. Early adoption is permitted. We early adopted ASU 2017-11 effective January
1, 2018 without a material impact on our consolidated financial statements.

Other recent accounting
pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's
present or future consolidated financial statements.

NOTE 2 - TRADING SECURITIES

Trading securities
are purchased with the intent of selling them in the short term. Trading securities are recorded at market value and the difference
between market value and cost of the securities is recorded as an unrealized gain or loss in the statement of operations. Gains
from the sales of such marketable securities will be utilized to fund payment of obligations and to provide working capital for
operations and to finance future growth, including, but not limited to: conducting our ongoing business, conducting strategic
business development, marketing analysis, due diligence investigations into possible acquisitions, and research and development
and implementation of the Company’s business plans generally.

The Company’s
securities investments that are bought and held principally for the purpose of selling them in the near term are classified as
trading securities. Trading securities are recorded at fair value based on quoted market price (level 1) on the balance sheet
in current assets, with the change in fair value during the period included in earnings.

Investments in
securities are summarized as follows:

Fair Value
at

Gain on

Unrealized

Fair Value
at

Year

Beginning
of Year

Sale

Loss

June
30, 2018

2018

$

48,000

$

—

$

(29,000

)

$

19,000

The following table
discloses the assets measured at fair value on a recurring basis and the methods used to determine fair value:

Fair Value Measurements
at Reporting Date Using

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Fair Value at

Markets

Observable Inputs

Inputs

June 30, 2018

(Level 1)

(Level 2)

(Level 3)

Trading securities

$ 19,000

$ 19,000

$ -

$ -

Money market funds

36,000

36,000

-

-

Total

$ 55,000

$ 55,000

$ -

$ -

11

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

Fair Value Measurements
at Reporting Date Using

Quoted Prices

Significant

Significant

in Active

Other

Unobservable

Fair Value at

Markets

Observable Inputs

Inputs

December 31, 2017

(Level 1)

(Level 2)

(Level 3)

Trading securities

$ 48,000

$ 48,000

$ -

$ -

Money market funds

36,000

36,000

-

-

Total

$ 84,000

$ 84,000

$ -

$ -

Generally, for
all trading securities and available-for-sale securities, fair value is determined by reference to quoted market prices (level
1).

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment
consisted of the following:

June
30,
2018

December
31,
2017

Equipment

$

28,000

$

28,000

Furniture
& fixtures

114,000

114,000

Leasehold
improvements

107,000

107,000

249,000

249,000

Less:
accumulated depreciation and amortization

(136,000

)

(115,000

)

Property
and Equipment, Net

$

113,000

$

134,000

Depreciation expense
for the six months ended June 30, 2018 and 2017 was $21,000 and $23,000, respectively.

NOTE 4 - RELATED PARTY TRANSACTIONS

On September 5,
2017, the Company obtained a revolving line of credit from Berkshire Capital Management Co., Inc. Berkshire is controlled by Joseph
Fiore, majority shareholder and former chairman of the board of directors of the Company. The line of credit allows the Company
to borrow up to $1,000,000 with interest at 6% per annum. The loan is secured by a first lien on all the assets of the Company
and its wholly owned subsidiary SPYR APPS, LLC. Repayment on the loan is due February 28, 2019. As of June 30, 2018, the Company
has borrowed $1,000,000 and accrued interest of $36,000.

During the six
months ended June 30, 2018, the Company received an additional $55,000 in the form of short-term advances from Berkshire Capital
Management Co., Inc. The $55,000 short-term advances are due upon demand.

During the six
months ended June 30, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive officer
of the Company for cash of $50,000.

12

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

NOTE 5 – CONVERTIBLE NOTES

On April 20, 2018,
the Company issued a $158,000 convertible note with original issue discount (OID) of $8,000 and bearing interest at 8% per annum.
The note matures on April 20, 2019 and is convertible on or after October 17, 2018 into the Company’s restricted common
stock at $0.20 per share at the holder’s request. The OID is recorded as a discount to the debt agreement. The Company has
determined the note to contain a beneficial conversion feature valued as $104,000 based on the intrinsic per share value of the
conversion feature. This beneficial conversion feature is recorded as a discount to the debt agreement. The noteholder was also
granted detachable 3-year warrants to purchase 200,000 shares of the company’s restricted common stock at an exercise price
of $0.375 per share, 200,000 shares of the company’s restricted common stock at an exercise price of $0.50 per share, and
100,000 shares of the company’s restricted common stock at an exercise price of $0.625 per share. The warrants were valued
at $126,000 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement. During the six months
ended June 30, 2018 the Company has accrued interest for this note in the amount of $3,000. At June 30, 2018, the principal balance
together with total accrued interest of $3,000 is recorded on the Company’s consolidated balance sheets net of discounts
of $127,000.

On May 22, 2018,
the Company issued a $275,000 convertible note with original issue discount (OID) of $25,000 and bearing a one-time interest charge
at 8%. The note matures on January 22, 2019 and is convertible into the Company’s restricted common stock at $0.25 per share
at the holder’s request. The OID is recorded as a discount to the debt agreement. The Company has determined the note to
contain a beneficial conversion feature valued as $40,000 based on the intrinsic per share value of the conversion feature. This
beneficial conversion feature is recorded as a discount to the debt agreement. The noteholder was also granted detachable 5-year
warrants to purchase 500,000 shares of the company’s restricted common stock at an exercise price of $2.00 per share. The
warrants were valued at $45,000 using the Black-Scholes pricing model and were recorded as a discount to the debt agreement. The
noteholder was also issued 200,000 shares of the company’s restricted common stock valued at $58,000 based upon the closing
price of the Company stock on the date of the agreement and recorded as a discount to the debt agreement. During the six months
ended June 30, 2018 the Company has accrued interest for this note in the amount of $3,000. At June 30, 2018, the principal balance
together with total accrued interest of $3,000 is recorded on the Company’s consolidated balance sheets net of discounts
of $116,000.

The following table
summarized the Company's convertible notes payable as of June 30, 2018 and December 31, 2017:

June
30,
2018

December
31,
2017

Beginning
Balance

$

—

$

—

Proceeds
from the issuance of convertible notes, net of issuance discounts

137,000

—

Repayments

—

—

Conversion
of notes payable into common stock

—

—

Amortization of discounts

53,000

Accrued
Interest

6,000

—

Ending
Balance

$

196,000

$

—

Convertible
notes, short term

$

433,000

$

—

Debt
discounts

$

243,000

$

—

NOTE 6 – COMMITMENTS AND
CONTINGENCIES

Legal Proceedings

We are involved
in certain legal proceedings that arise from time to time in the ordinary course of our business. Except for income tax contingencies,
we record accruals for contingencies to the extent that our management concludes that the occurrence is probable and that the
related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
A material legal proceeding that is currently pending is as follows:

On October 14,
2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case:
Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible
debentures in the aggregate principal amount of $1,500,000 in 1998. On July 12, 2018, the court approved a Joint Motion for Order
Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000,
warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares
at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000.
The total value of the settlement, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated
balance sheets as of June 30, 2018 and December 31, 2017.

13

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

On June 18, 2018
the Company was named as a defendant in a case filed in the United States District Court for the Southern District of New York:
Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management Co., Inc., and Eat at Joe’s, Ltd. n/k/a
SPYR, Inc. Joseph A. Fiore was the Chairman of our Board of Directors and is a significant shareholder. Mr. Fiore resigned from
his positions as Chairman of the Board and as a Director of the Company effective August 1, 2018. The suit alleges that Mr. Fiore,
during 2013 and 2014, while he was the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board
of Directors, engaged in improper conduct on behalf of the defendants named in the case related to the Company’s sales of
securities in Plandai Biotechnology, Inc. The Commission alleges that Mr. Fiore and the Company unlawfully benefited through the
sales of those securities. The Commission also alleges that from 2013 to 2014, the Company’s primary business was investing
and that it failed to register as an investment company, resulting in an alleged violation of Section 7(a) of the Investment Company
Act of 1940. The suit seeks to disgorge Joseph A. Fiore, Berkshire Capital Management Co., Inc., and the Company of alleged profits
on the sale of the securities and civil fines related to the Company’s failure to register as an investment company with
the Commission.

The Company vehemently
denies any wrongdoing. The allegations demonstrate a fundamental misunderstanding of existing precedent and a mischaracterization
of the facts and transactions at issue, which were not violative of any securities laws, rules or regulations. The Company will
answer these allegations in court.

The Company is
being represented by Alex Spiro, Esq., a partner with the firm of Quinn Emmanuel, Urquhart & Sullivan, LLP and Marc S. Gottlieb,
Esq., a partner with the firm of Ortoli Rosenstadt LLP.

Employment Agreements

Pursuant to employment
agreements entered in December 2014 and October 2015, the Company agreed to compensate three officers with a base salary in the
aggregate of $450,000 per year through 2020. In addition, as part of the employment agreement, the Company also agreed to grant
these officers an aggregate of 1.55 million shares of common stock at the beginning of each employment year.

Game Development
Agreements

The Company is
party to various game development agreements. Payments are contingent upon the developer(s) meeting specified milestones and game
performance. Pursuant to these agreements, the Company has agreed to pay up to $416,000 during the period from July 2018 through
January 2019.

Common Stock
To Be Issued

The Company is
party to various third-party service agreements to be paid through the issuance of the company’s restricted common stock.
Contingent upon the third parties providing the agreed upon services, the Company will issue up to 2,403,769 restricted common
shares and 200,000 common stock warrants at various intervals during the period from July 2018 through October 2019. The shares
will be recorded at fair value on the date earned under the respective agreements.

NOTE 7 – EQUITY TRANSACTIONS

Common Stock:

Six Months
Ended June 30, 2018:

During the six
months ended June 30, 2018, the Company issued an aggregate of 6,200,000 shares of restricted common stock to third parties for
cash of $855,000.

14

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

During the six
months ended June 30, 2018, the Company issued 500,000 shares of restricted common stock to the father of an executive officer
of the Company for cash of $50,000.

During the six
months ended June 30, 2018, the Company issued an aggregate of 1,250,000 shares of restricted common stock to employees with a
total fair value of $625,000 for services rendered. The shares issued are non-refundable and deemed earned upon issuance. As a
result, the Company expensed the entire $625,000 upon issuance. The shares issued were valued at the date earned under the respective
agreement based upon closing market price of the Company’s common stock.

During the six
months ended June 30, 2018, the Company issued an aggregate of 5,337,782 shares of restricted common stock to consultants with
a total fair value of $1,929,000. The shares issued are non-refundable and deemed earned upon issuance. As a result, the Company
expensed the entire $1,929,000 upon issuance. The shares issued were valued at the date earned under the respective agreements
based upon closing market price of the Company’s common stock.

During the six
months ended June 30, 2018, the Company cancelled an aggregate of 625,000 shares of restricted common stock on termination of
a third-party service agreement with a total fair value on the date of termination of $207,000. The Company recorded a gain on
cancellation of $113,000 for the portion of shares (375,000) issued during 2017 and reversed expenses of $94,000 for the portion
of shares (250,000) issued during 2018. The shares issued were valued at the termination date of the agreement based upon closing
market price of the Company’s common stock.

Options:

The following table
summarizes common stock options activity:

Weighted

Average

Exercise

Options

Price

December
31, 2017

13,320,000

$

1.74

Granted

420,000

1.00

Exercised

—

—

Forfeited

—

—

Outstanding, June 30, 2018

13,740,000

$

1.72

Exercisable, June 30, 2018

12,960,000

$

1.61

During the year
ended December 31, 2017, the Company granted stock options to a consultant to purchase a total of 420,000 shares of common stock.
During the six months ended June 30, 2018, the Company renewed the contract for an additional year and granted the consultant
an additional 420,000 stock options with a total fair value of $115,000. A total of 350,000 vested during 2017, 210,000 options
vested during the six months ended June 30, 2018 while the remaining 280,000 options will vest through February 2019 at a rate
of 35,000 shares per month. The options are exercisable at $1.00 per share and will expire over 4 years. The fair values of the
options are recorded at their respective grant dates computed using the Black-Scholes Option Pricing Model. During the six months
ended June 30, 2018, the Company recognized $80,000 in compensation expense based upon the vesting of outstanding options. As
of June 30, 2018, the unamortized compensation expense for unvested options was $77,000 which will be recognized over the vesting
period.

The weighted average
exercise prices, remaining lives for options granted, and exercisable as of June 30, 2018 were as follows:

Outstanding Options

Exercisable Options

Options

Weighted

Weighted

Exercise Price

Life

Average Exercise

Average Exercise

Per Share

Shares

(Years)

Price

Shares

Price

$0.50

8,000,000

2.17

$0.50

8,000,000

$0.50

$1.00

1,490,000

1.32 – 3.61

$1.00

1,210,000

$1.00

$2.50

1,250,000

.50

$2.50

1,250,000

$2.50

$5.00

3,000,000

1.50

$5.00

2,500,000

$5.00

13,740,000

$1.72

12,960,000

$1.61

15

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

At June 30, 2018, the Company’s
closing stock price was $0.305 per share. As all outstanding options had an exercise price greater than $0.305 per share, there
was no intrinsic value of the options outstanding at June 30, 2018.

The following table
summarizes options granted with vesting terms activity:

Weighted

Average

Number of

Grant Date

Shares

Fair Value

Non-vested, December 31, 2017

70,000

$

1.00

Granted

420,000

1.00

Vested

(210,000)

1.00

Forfeited

—

—

Non-vested, June 30, 2018

280,000

$

1.00

Warrants:

The following table
summarizes common stock warrants activity:

Weighted

Average

Exercise

Warrants

Price

Outstanding,
December 31, 2017

1,700,000

$

1.06

Granted

3,600,000

0.60

Exercised

—

—

Forfeited

—

—

Outstanding, June 30, 2018

5,300,000

$

0.75

Exercisable, June 30, 2018

5,300,000

$

0.75

In January 2018,
pursuant to a services agreement, the Company granted warrants to purchase a total of 1,200,000 shares of restricted common stock
with an exercise price of $0.40 and will expire 36 months after date of grant. The warrants are fully vested and exercisable upon
grant. Total fair value of the warrants at grant date amounted to $383,000 computed using the Black-Scholes Option Pricing Model
and was fully recognized on the date of grant.

In March 2018,
pursuant to a stock purchase agreement, the Company granted warrants to purchase a total of 700,000 shares of restricted common
stock with an exercise price of $0.50 and will expire March 18, 2023. The warrants are fully vested and exercisable upon grant.
Total fair value of the options at grant date amounted to $234,000 computed using the Black-Scholes Option Pricing Model and was
fully recognized on the date of grant.

In April 2018,
in combination with a 12-month convertible promissory note, the Company granted warrants to purchase a total of 500,000 shares
of restricted common stock with exercise prices ranging from $0.375 to $0.625 and will expire April 20, 2021. The warrants are
fully vested and exercisable upon grant. The proceeds of the note were allocated between the note and the warrants based on the
relative fair values which resulted in proceeds of $69,000 allocated to the warrants and recorded as paid in capital and debt
discount. The debt discount will be amortized over the life of the note as interest expense. During the six months ended June
30, 2018, the Company recognized $13,000 of debt discount interest. As of June 30, 2018, the unamortized debt discount was $56,000
which will be recognized over the life of the note.

In May 2018, in
combination with an 8-month convertible promissory note, the Company granted warrants to purchase a total of 200,000 shares of
restricted common stock with an exercise prices of $2.00 and will expire May 22, 2023. The warrants are fully vested and exercisable
upon grant. The proceeds of the note were allocated between the note and the warrants based on the relative fair values which
resulted in proceeds of $32,000 allocated to the warrants and recorded as paid in capital and debt discount. The debt discount
will be amortized over the life of the note as interest expense. During the six months ended June 30, 2018, the Company
recognized $5,000 of debt discount interest. As of June 30, 2018, the unamortized debt discount was $27,000 which will be recognized
over the life of the note.

16

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

In May 2018, pursuant
to a stock purchase agreement, the Company granted warrants to purchase a total of 1,000,000 shares of restricted common stock
with exercise prices ranging from $0.50 to $1.00 and will expire May 29, 2021. The warrants are fully vested and exercisable upon
grant. Total fair value of the options at grant date amounted to $184,000 computed using the Black-Scholes Option Pricing Model
and was fully recognized on the date of grant.

The weighted average
exercise prices, remaining lives for warrants granted, and exercisable as of June 30, 2018, were as follows:

Outstanding and Exercisable
Warrants

Warrants

Exercise Price

Life

Per Share

Shares

(Years)

$0.01

600,000

2.51

$0.375

200,000

2.81

$0.40

1,200,000

2.54

$0.50

1,500,000

0.33 – 4.72

$0.625

100,000

2.81

$0.75

250,000

2.92

$1.00

250,000

2.92

$1.50

500,000

0.50

$2.00

700,000

1.77 – 4.90

5,300,000

At June 30, 2018,
the Company’s closing stock price was $0.305 per share. The Company had 600,000 warrants outstanding with exercise prices
less than $0.305 with an intrinsic value of $182,400 at June 30, 2018.

The table below
represents the average assumptions used in valuing the stock options and warrants granted in fiscal 2018:

Six Months Ended June 30,

2018

Expected life in years

3.00
– 5.00

Stock price volatility

138% - 153%

Risk free interest rate

2.12 % - 2.9%

Expected dividends

—

Forfeiture rate

—

The assumptions
used in the Black Scholes models referred to above are based upon the following data: (1) the contractual life of the underlying
non-employee options is the expected life. The expected life of the employee option is estimated by considering the contractual
term of the option, the vesting period of the option, the employees’ expected exercise behavior and the post-vesting employee
turnover rate. (2) The expected stock price volatility was based upon the Company’s historical stock price over the expected
term of the option. (3) The risk-free interest rate is based on published U.S. Treasury Department interest rates for the expected
terms of the underlying options. (4) The expected dividend yield was based on the fact that the Company has not paid dividends
to common shareholders in the past and does not expect to pay dividends to common shareholders in the future. (5) The expected
forfeiture rate is based on historical forfeiture activity and assumptions regarding future forfeitures based on the composition
of current grantees.

Shares Reserved:

At June 30, 2018,
the Company has reserved 30,000,000 shares of common stock in connection with 2 convertible notes with detachable warrants.

17

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

NOTE 8 – DISCONTINUED OPERATIONS

Restaurant

Through our other
wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April
2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the restaurant
segment is reported as discontinued operations.

The following table
summarizes the assets and liabilities of our discontinued restaurant segment's discontinued operations as of June 30, 2018 and
December 31, 2017:

June 30,
2018

December 31,
2017

Assets:

Total Assets

$

—

$

—

Liabilities:

Accounts
payable and accrued liabilities

$

22,000

$

22,000

Total Liabilities

$

22,000

$

22,000

The following table
summarizes the results of operations of our discontinued restaurant for the three and six months ended June 30, 2018 and 2017
and is included in the consolidated statements of operations as discontinued operations:

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018

2017

2018

2017

Revenues

$

—

$

109,000

$

—

$

421,000

Cost of sales

—

35,000

—

134,000

Gross
Margin

—

74,000

—

287,000

Expenses

Labor and related expenses

—

55,000

—

178,000

Rent

—

21,000

1,000

82,000

Depreciation and amortization

—

5,000

—

20,000

Professional fees

—

3,000

—

3,000

Other
general and administrative

—

40,000

1,000

89,000

Total
Operating Expenses

—

124,000

2,000

372,000

Operating
Income (Loss)

—

(50,000

)

(2,000

)

(85,000

)

Other Income (Expense)

Loss on
disposal of assets

—

(19,000

)

—

(19,000

)

Income (Loss) on discontinued
operations

$

—

$

(69,000

)

$

(2,000

)

$

(104,000

)

18

SPYR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Six Months Ended June 30, 2018 and 2017

(Unaudited)

NOTE 9 – SUBSEQUENT EVENTS

Subsequent to June
30, 2018, the Company issued 603,334 shares of common stock pursuant to various third-party service agreements.

On July 12, 2018,
the court approved a Joint Motion for Order Approving Settlement Agreement. Pursuant to the settlement, the Company will issue
3,500,000 common shares valued at $1,050,000, warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000,
warrants to purchase 1,500,000 common shares at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common
shares at $0.75 per share valued at $259,000. The total value of the settlement, $1,983,000 has been recorded as litigation settlement
liability on the accompanying consolidated balance sheets as of December 31, 2017 and 2016, with a corresponding charge to litigation
settlement costs on the consolidated statement of operations for the year ended December 31, 2016,

19

ITEM 2.

MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis
of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements
and supplementary data referred to in this Form 10-Q.

This discussion
contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning
revenue sources and concentration, selling, general and administrative expenses and capital resources, are subject to risks and
uncertainties, including, but not limited to, those discussed elsewhere in this Form 10-Q that could cause actual results to differ
materially from those projected. Unless otherwise expressly indicated, the information set forth in this Form 10-Q is as of June
30, 2018, and we undertake no duty to update this information.

Plan of Operations
– Through our wholly owned subsidiary SPYR APPS, LLC, d/b/a SPYR GAMES we develop, publish and co-publish mobile games,
and then generate revenue through those games by way of advertising and in-app purchases. Our primary focus is on the development
and expansion of our mobile games and applications. We anticipate we will need to hire additional employees during 2018 to help
with the development and marketing of existing and future games and applications.

During the past
two years we have invested in the Company’s future by working closely with the development team at Spectacle Games to optimize
game play and expand the availability of our game Pocket Starships to more users through new and existing game portals, social
networking sites and app stores throughout the world. During 2017, we signed an agreement with CBS Consumer Products that will
allow the incorporation of intellectual property (IP) from various Star Trek television series into future Pocket Starships updates
and expansions. Our Pocket Starships development team is already working on expansions of Pocket Starships to include the Star
Trek IP, which we expect will be released during the second half of 2018. In Pocket Starships, players can build and pilot
several ships and forge alliances on their quest for galactic domination. Players can perform or initiate various activities ranging
from fighting pirates to participating in Faction Alerts. With the release of the expansion, those playing Pocket Starships will
be able to explore new sectors and engage in exciting battles with the Borg and will be able to staff their ships with their favorite
Star Trek characters from the Star Trek TV series franchise – including Star Trek: The Next Generation, Star Trek:
Deep Space Nine, and Star Trek: Voyager, through a trading card expansion. In addition, working together with the development
team at Reset Studios LLC, we have developed a new tapper game, Steven Universe: Tap Together, featuring characters and storylines
from Steven Universe, a popular animated television series on Cartoon Network. Steven Universe: Tap Together was launched
globally on the Google Play Store on August 2, 2018 and on the IOS App Store on August 9, 2018.

Management’s
plan for the next 12 months is to build upon this foundation and focus our efforts on marketing and optimizing user acquisition
and retention. We will also continue to provide the monthly advances to Spectacle and Reset for further development, enhancement
and maintenance of the games as needed to meet the needs of the users and maximize revenue into the future. In addition to our
plans for Pocket Starships and Steven Universe: Tap Together, we will continue to seek additional games and apps to publish as
we strive to broaden our range of products and increase revenues and operating cash flows. We expect these marketing, development
and expansion plans will be financed through existing cash, operating cash flows from game revenues and other forms of financing
such as the sale of additional equity and debt securities, capital leases and other credit facilities. The Company may also decide
to expand and/or diversify, through acquisition or otherwise, in other related or unrelated business areas if opportunities present
themselves.

20

COMPARISON OF
THE SIX MONTHS ENDED JUNE 30, 2018 TO 2017

The consolidated
results of continuing operations for the six months ended June 30, 2018 and 2017 are as follows:

Digital
Media

Corporate

Consolidated

Six Months Ended June 30, 2018

Revenues

$

27,000

$

—

$

27,000

Labor and related expenses

149,000

972,000

1,121,000

Rent

15,000

73,000

88,000

Depreciation and amortization

36,000

21,000

57,000

Professional fees

167,000

2,907,000

3,074,000

Research and development

453,000

—

453,000

Other general and administrative

95,000

132,000

227,000

Operating loss

(888,000

)

(4,105,000

)

(4,993,000

)

Other expense

(15,000

)

(5,000

)

(20,000

)

Loss from continuing operations

$

(903,000

)

$

(4,110,000

)

$

(5,013,000

)

Six Months Ended June 30, 2017

Revenues

$

84,000

$

—

$

84,000

Labor and related expenses

551,000

1,127,000

1,678,000

Rent

15,000

72,000

87,000

Depreciation and amortization

22,000

23,000

45,000

Professional fees

305,000

2,587,000

2,892,000

Research and development

265,000

—

265,000

Other general and administrative

587,000

116,000

703,000

Operating income (loss)

(1,661,000

)

(3,925,000

)

(5,586,000

)

Other income (expense)

—

(23,000

)

(23,000

)

Loss from continuing operations

$

(1,661,000

)

$

(3,948,000

)

(5,609,000

)

Results of Operations
- For the six months ended June 30, 2018 the Company had a loss from continuing operations of $5,013,000 compared to a loss
from continuing operations of approximately $5,609,000 for the six months ended June 30, 2017. This change is due primarily to
decreases in labor and related expenses of $557,000 and decreases in other general and administrative costs $476,000 during the
six months ended June 30, 2018 compared to the six months ended June 30, 2017.

More detailed explanation
of the six months ended June 30, 2018 and 2017 changes are included in the following discussions.

Total Revenues
- For the six months ended June 30, 2018 and 2017, the Company had total sales of $27,000 and $84,000, respectively, for a decrease
of $57,000. This change is due to the cessation of marketing during the latter part of 2017 and first two quarters of 2018 pending
updates and expansion of our games Pocket Starships. Management plans to expand its mobile application and game development and
monetization efforts and believes the anticipated updates to Pocket Starships with Star Trek IP, and the release of Steven
Universe: Tap Together and finalizing the acquisition of a new game during 2018 will bring increased revenues in the coming year.

Labor and related
expenses include the costs of salaries, wages, leased employees, contract labor, and the fair value of common stock and options
granted to employees for services. For the six months ended June 30, 2018 the company had total labor and related expenses of
$1,121,000 with $485,000 being settled in cash and $636,000 being paid in restricted common stock and vesting of options recorded
at fair value. For the six months ended June 30, 2017 the company had total labor and related expenses of $1,678,000 with $510,000
being settled in cash and $1,168,000 being paid in restricted stock recorded at fair value. The cost of labor is expected to increase
in conjunction with expansion of the digital media operations.

The cost of rent
increased $1,000 from $87,000 for the six months ended June 30, 2017 to $88,000 for the six months ended June 30, 2018. The Company
leases approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated May 21,
2015 and expiring on December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging from
$142,000 to $152,000. Beginning July 2017, we began leasing office space in Berlin, Germany for EUR 3,570 per month through March
31, 2018. The Berlin office was used by leased employees hired by the Company for the operation of our Pocket Starships game.
Beginning October 17, 2016, we began leasing shared office for one employee in Redmond, Washington on a month to month basis at
a cost of $275 per month per desk.

Depreciation and
amortization expenses increased by approximately $12,000 for the six months ended June 30, 2018 compared to the six months ended
June 30, 2017. This increase is primarily attributable to amortization of the $481,000 of gaming assets acquired during fourth
quarter 2017.

21

Professional fees
increased $182,000 from $2,892,000 for the six months ended June 30, 2017 to $3,074,000 for the six months ended June 30, 2018.
This increase is Professional fees during 2018 included the grant of 5,587,782 shares of restricted common stock, 420,000 options
and 2,900,000 warrants to purchase restricted common stock issued to third parties for consulting services, public relations,
and other professional fees with a total fair value of $2,811,000. The remaining $263,000 is due to $207,000 in legal, accounting
and other professional service needs, $46,000 for public relations, and $10,000 in consulting services related to our digital
media operations. Professional fees during the six months ended June 30, 2017 included the grant of 2,715,000 shares of restricted
common stock and 720,000 option issued to third parties for consulting services, public relations and vesting of shares of restricted
common stock recorded at fair value of $2,172,000. The remaining $720,000 is due to $167,000 in legal, accounting and other professional
service needs, $417,000 for public relations, and $136,000 in consulting services related to our digital media operations.

Research and development
costs. During the six months ended June 30, 2018, the Company incurred research and development costs of $453,000 in connection
with fees paid to game developers for the development of its current and soon to be released games, compared to research and development
costs of $265,000 during the six months ended June 30, 2017.

Other general and
administrative expenses decreased $476,000 for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.
The decrease can be attributed primarily to marketing costs which decreased by $124,000 and various other general and administrative
cost decreases.

The Company had
interest expense on a related party line of credit, convertible notes payable and accrued expenses of $104,000 for the six months
ended June 30, 2018. The company did not have interest expense for the six months ended June 30, 2017.

The Company cancelled
an aggregate of 625,000 shares of restricted common stock on termination of a third-party service agreement with a total fair
value on the date of termination of $207,000. The Company recorded a gain on cancellation of $113,000 during the six months ended
June 30, 2018. The company did not have a gain on cancellation of shares for the six months ended June 30, 2017.

The Company had
unrealized losses on trading securities of $29,000 for the six months ended June 30, 2018 compared to unrealized losses of $27,000
for the six months ended June 30, 2017. Unrealized gains and losses are the result of fluctuations in the quoted market price
of the underlying securities at the respective reporting dates.

COMPARISON OF
THE THREE MONTHS ENDED JUNE 30, 2018 TO 2017

The consolidated
results of continuing operations for the three months ended June 30, 2018 and 2017 are as follows:

Digital
Media

Corporate

Consolidated

Three Months Ended June 30, 2018

Revenues

$

21,000

$

—

$

21,000

Labor and related expenses

68,000

167,000

235,000

Rent

2,000

37,000

39,000

Depreciation and amortization

18,000

10,000

28,000

Professional fees

64,000

454,000

518,000

Research and development

154,000

—

154,000

Other general and administrative

49,000

73,000

122,000

Operating loss

(334,000

)

(741,000

)

(1,075,000

)

Other expense

(9,000

)

20,000

11,000

Loss from continuing operations

$

(343,000

)

$

(721,000

)

$

(1,064,000

)

22

Three Months Ended June 30, 2017

Revenues

$

32,000

$

—

$

32,000

Labor and related expenses

168,000

140,000

308,000

Rent

12,000

37,000

49,000

Depreciation and amortization

19,000

11,000

30,000

Professional fees

212,000

1,088,000

1,300,000

Research and development

152,000

—

152,000

Other general and administrative

314,000

55,000

369,000

Operating income (loss)

(845,000

)

(1,331,000

)

(2,176,000

)

Other income (expense)

—

(11,000

)

(11,000

)

Loss from continuing operations

$

(845,000

)

$

(1,342,000

)

$

(2,187,000

)

Results of Operations
- For the three months ended June 30, 2018 the Company had a loss from continuing operations of $1,064,000 compared to a loss
from continuing operations of approximately $2,187,000 for the three months ended June 30, 2017. This change is due primarily
to decreases in labor and related expenses of $73,000, rent of $10,000, professional fees of 782,000, and other general and administrative
costs $247,000 during the three months ended June 30, 2018 compared to the three months ended June 30, 2017.

More detailed explanation
of the three months ended June 30, 2018 and 2017 changes are included in the following discussions.

Total Revenues
- For the three months ended June 30, 2018 and 2017, the Company had total sales of $21,000 and $32,000, respectively, for a decrease
of $11,000. This change is due to the cessation of marketing during the latter part of 2017 and first two quarters of 2018 for
updates and expansion of our existing games. Management plans to expand its mobile application and game development and monetization
efforts and believes the anticipated updates to Pocket Starships with Star Trek IP and the release two new idle tapper
games planned during 2018 will bring increased revenues in the coming year.

Labor and related
expenses include the costs of salaries, wages, leased employees, contract labor, and the fair value of common stock and options
granted to employees for services. For the three months ended June 30, 2018 the company had total labor and related expenses of
$235,000 with $230,000 being settled in cash and $5,000 being paid in vesting of options recorded at fair value. For the three
months ended June 30, 2017 the company had total labor and related expenses of $308,000 with $293,000 being settled in cash and
$15,000 being paid in restricted stock recorded at fair value. The cost of labor is expected to increase in conjunction with expansion
of the digital media operations.

The cost of rent
decreased $10,000 from $49,000 for the three months ended June 30, 2017 to $39,000 for the three months ended June 30, 2018. The
Company leases approximately 5,169 square feet at 4643 South Ulster Street, Denver, Colorado pursuant to an amended lease dated
May 21, 2015 and expiring on December 31, 2020. Under the lease, the Company pays annual base rent on an escalating scale ranging
from $142,000 to $152,000. Beginning July 2017, we began leasing office space in Berlin, Germany for EUR 3,570 per month through
March 31, 2018. The Berlin office was used by leased employees hired by the Company for the operation of our Pocket Starships
game. Beginning October 17, 2016, we began leasing shared office for one employee in Redmond, Washington on a month to month basis
at a cost of $275 per month per desk.

Depreciation and
amortization expenses decreased by approximately $2,000 for the three months ended June 30, 2018 compared to the three months
ended June 30, 2017.

Professional fees
decreased $782,000 from $1,300,000 for the three months ended June 30, 2017 to $518,000 for the three months ended June 30, 2018.
This decrease is Professional fees during 2018 included the grant of 1,045,840 shares of restricted common stock and 1,000,000
warrants to purchase restricted common stock issued to third parties for consulting services, public relations, and other professional
fees with a total fair value of $430,000. The remaining $88,000 is due to $70,000 in legal, accounting and other professional
service needs, $17,000 for public relations, and $1,000 in consulting services related to our digital media operations. Professional
fees during the three months ended June 30, 2017 included the grant of 1,155,000 shares of restricted common stock and 150,000
option issued to third parties for consulting services, public relations and vesting of shares of restricted common stock recorded
at fair value of $965,000. The remaining $335,000 is due to $72,000 in legal, accounting and other professional service needs,
$172,000 for public relations, and $91,000 in consulting services related to our digital media operations.

23

Research and development
costs. During the three months ended June 30, 2018, the Company incurred research and development costs of $154,000 in connection
with fees paid to game developers for the development of its current and soon to be released games, compared to research and development
costs of $152,000 during the three months ended June 30, 2017.

Other general and
administrative expenses decreased $247,000 for the three months ended June 30, 2018 compared to the three months ended June 30,
2017. The decrease can be attributed primarily to marketing costs which decreased by $85,000 and various other general and administrative
cost decreases.

The Company had
interest expense on a related party line of credit, convertible notes payable and accrued expenses of $84,000 for the three months
ended June 30, 2018. The company did not have interest expense for the three months ended June 30, 2017.

The Company cancelled
an aggregate of 625,000 shares of restricted common stock on termination of a third-party service agreement with a total fair
value on the date of termination of $207,000. The Company recorded a gain on cancellation of $113,000 during the three months
ended June 30, 2018. The company did not have a gain on cancellation of shares for the three months ended June 30, 2017.

The Company had
unrealized losses on trading securities of $18,000 for the three months ended June 30, 2018 compared to unrealized losses of $12,000
for the three months ended June 30, 2017. Unrealized gains and losses are the result of fluctuations in the quoted market price
of the underlying securities at the respective reporting dates.

DISCONTINUED OPERATIONS

Through our other
wholly owned subsidiary, E.A.J.: PHL Airport, Inc., we owned and operated the restaurant “Eat at Joe’s®,”
which was located in the Philadelphia International Airport since 1997. Our lease in the Philadelphia Airport expired in April
2017. Concurrent with expiration of the lease the restaurant closed. Pursuant to current accounting guidelines, the assets and
liabilities of EAJ as well as the results of its operations were presented in the accompanying financial statements as discontinued
operations.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying
financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

The Company has generated a net loss
from continuing operations for the six months ended June 30, 2018 of approximately $5,013,000. As of June 30, 2018, the Company
had current assets of $231,000, which included cash and cash equivalents of $168,000, accounts receivable of $18,000 and trading
securities of approximately $19,000.

During the six
months ended June 30, 2018, the Company has met its capital requirements through a combination of collection of receivables, the
sale of restricted common stock of $905,000, related party short-term advances of $55,000, borrowing from a related party line
of credit of $200,000, convertible debt borrowing from third-party lenders of $400,000, and through the use of existing cash reserves.

On April 20, 2018.
the Company signed a convertible promissory note with a third-party lender for up to $475,000 (net of original issue discount
of $25,000). The note is for 12 months with interest at 8% per annum on the unpaid principal amount. The note holder has the right,
at any time on or after 181 calendar days after the date of the note, to convert all or any portion of the outstanding principal
and interest into the Company’s restricted common stock at $0.20 per share. On April 26, 2018 the Company borrowed $150,000
on this note.

On May 22, 2018,
the Company signed a convertible promissory note with a third-party lender for up to $250,000 (net of original issue discount
of $25,000). The note is for 8 months with a one-time interest charge of 8% on the issuance date outstanding balance. The note
holder has the right, at any time on or after the issuance date, to convert all or any portion of the outstanding principal and
interest into the Company’s restricted common stock at $0.25 per share. On May 22, 2018 the Company borrowed $250,000 on
this note.

24

As previously described,
during the past two years we have invested in the Company’s future by working closely with the development team at Spectacle
Games to optimize game play and expand the availability of our game Pocket Starships to more users through new and existing game
portals, social networking sites and app stores throughout the world. During 2017, we signed an agreement with CBS Consumer Products
that will allow the incorporation of intellectual property (IP) from various Star Trek television series into future Pocket Starships
updates and expansions. Our Pocket Starships development team is already working on expansions of Pocket Starships to include
the Star Trek IP, which we expect will be released during the second half of 2018. In Pocket Starships, players can build
and pilot several ships and forge alliances on their quest for galactic domination. Players can perform or initiate various activities
ranging from fighting pirates to participating in Faction Alerts. With the release of the expansion, those playing Pocket Starships
will be able to explore new sectors and engage in exciting battles with the Borg and will be able to staff their ships with their
favorite Star Trek characters from the Star Trek TV series franchise – including Star Trek: The Next Generation,
Star Trek: Deep Space Nine, and Star Trek: Voyager, through a trading card expansion.

In addition, working
together with the development team at Reset Studios LLC, we have developed of a new tapper game, Steven Universe: Tap Together,
featuring characters and storylines from Steven Universe, a popular animated television series on Cartoon Network. Steven
Universe: Tap Together was launched globally on the Google Play Store on August 2, 2018 and on the IOS App Store on August 9,
2018.

The Company will
continue to seek additional capital through the sale of its common stock, debt financing and through expansion of its existing
and new products. If these goals do not materialize as planned, we believe that the Company can reduce its operating and product
development costs and that would allow us to maintain sufficient cash levels to continue operations. However, if we are not able
to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations
as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance
that we will be able to obtain such financing on acceptable terms, or at all.

Operating Activities
- For the six months ended June 30, 2018, the Company used cash in operating activities from continuing operations of $1,476,000.
For the six months ended June 30, 2017, the Company used cash in operating activities of $2,111,000. Operating activities consist
of corporate overhead and development of our digital media publishing, advertising and gaming operations. Decreases are due primarily
to decreases in cash settled professional fees, game development costs, and other general and administrative expenses partially
offset by increased in rent and cash settled labor and related costs. See the above results of operations discussion for more
details.

Investing
Activities – The Company did not have any investing activities during the six months
ended June 30, 2018. During the six months ended June 30, 2017,
the Company used cash of $50,000 for the purchase of software licensing rights.

Financing
Activities - During the six months ended June 30, 2018, the Company sold 6,700,000 shares
of restricted common stock to third parties and one related party for $905,000, borrowed $55,000 from a related party short-term
advance, borrowed $200,000 from a related party line of credit, and borrowed $400,000 from convertible debt from third-party lenders.
During the six months ended June 30, 2017,
the Company sold 750,000 shares of restricted common stock to a former officer/employee for $300,000.

The Company expects
future development and expansion will be financed through cash flows from operations and other forms of financing such as the
sale of additional equity and debt securities, capital leases and other credit facilities. There are no assurances that such financing
will be available on terms acceptable or favorable to the Company.

Government Regulations
- The Company is subject to all pertinent Federal, State, and Local laws governing its business. Each subsidiary is subject
to licensing and regulation by a number of authorities in its State or municipality. These may include health, safety, and fire
regulations. The Company's operations are also subject to Federal and State minimum wage laws governing such matters as working
conditions, overtime and tip credits.

Critical Accounting
Policies - The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities of the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Note 1 to the Consolidated Financial Statements describes the significant accounting
policies and methods used in the preparation of the Consolidated Financial Statements. Estimates are used for, but not limited
to, contingencies and taxes. Actual results could differ materially from those estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements.

25

Revenue Recognition

We determine revenue
recognition by: (1) identifying the contract, or contracts, with our customer; (2) identifying the performance obligations in
the contract; (3) determining the transaction price; (4) allocating the transaction price to performance obligations in the contract;
and (5) recognizing revenue when, or as, we satisfy performance obligations by transferring the promised goods or services.

Through our wholly
owned subsidiary SPYR APPS, LLC, d/b/a SPYR GAMES, we develop, publish and co-publish mobile games, and then generate revenue
through those games by way of advertising and in-app purchases. The Company’s dedicated mobile gaming applications can be
downloaded through the app stores maintained by Apple and Google. The Company’s cross platform gaming application, which
can be played on personal computers, Facebook and mobile devices, can be downloaded from the internet and Facebook as well as
through the app stores maintained by Apple, Google and Amazon.

We operate our
games as live services that allow players to play for free. Within these games players can purchase virtual items to enhance their
game-playing experience. Our identified performance obligation is to display the virtual items within the game. Payment is required
at time of purchase and the purchase price is a fixed amount.

Players can purchase
our virtual items through various widely accepted payment methods offered in the games, including Apple iTunes accounts, Google
Play accounts, Facebook local currency payments, PayPal and credit cards. Payments from players for virtual items are non-refundable
and relate to non-cancellable contracts that specify our obligations.

For revenue earned
through app stores, players utilize the app store’s local currency-based payments program to purchase virtual items in our
games. For all payment transactions on these app store platforms, the app store remits to us 70% of the price we request to be
charged to the player for each transaction, which represents the transaction price. We recognize revenue net of the amounts retained
by the app stores for platform and payment processing fees.

Stock-Based Compensation

The Company periodically
issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing
costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance
provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and
recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees
in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement
date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized
over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements
by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period
of the measurement date.

The fair value
of the Company's stock option and warrant grants is estimated using the Black-Scholes Option Pricing model, which uses certain
assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model and based
on actual experience. The assumptions used in the Black-Scholes Option Pricing model could materially affect compensation expense
recorded in future periods.

The Company also
issues restricted shares of its common stock for share-based compensation programs to employees and non-employees. The Company
measures the compensation cost with respect to restricted shares to employees based upon the estimated fair value at the date
of the grant and is recognized as expense over the period which an employee is required to provide services in exchange for the
award. For non-employees, the Company measures the compensation cost with respect to restricted shares based upon the estimated
fair value at measurement date which is either a) the date at which a performance commitment is reached, or b) at the date at
which the necessary performance to earn the equity instruments is complete.

Loss Contingencies

The Company is
subject to various loss contingencies arising in the ordinary course of business. The Company considers the likelihood of loss
or impairment of an asset or the incurrence of a liability, as well as its ability to reasonably estimate the amount of loss in
determining loss contingencies. An estimated loss contingency is accrued when management concludes that it is probable that an
asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. The
Company regularly evaluates current information available to us to determine whether such accruals should be adjusted.

26

Recent Accounting Pronouncements

See Note 1 of the
consolidated financial statements for discussion of recent accounting pronouncements.

ITEM 3.

QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.

CONTROLS
AND PROCEDURES

Disclosure Controls
and Procedures

Management of the
Company is responsible for maintaining disclosure controls and procedures that are designed to ensure that financial information
required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (the “Exchange
Act”) is recorded, processed, summarized and reported within the timeframes specified in the Securities and Exchange Commission’s
rules and forms, consistent with Items 307 and 308 of Regulation S-K.

In addition, the
disclosure controls and procedures must ensure that such financial information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required financial and other required disclosures.

As of June 30,
2018, an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13(a)-15(e)
and 15(d)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”) was carried out under the supervision
and with the participation of our Chief Executive Officer, Chief Financial Officer, and other persons carrying out similar functions
for the Company. In making this assessment, Management used the criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) (Revised 2013) in Internal Control over Financial Reporting - Guidance for Smaller Public Companies.
Based on the evaluation of the Company’s disclosure controls and procedures, Management concluded that during the period
covered by this report, such disclosure controls and procedures were not effective, due to certain identified material weaknesses.
These identified material weaknesses include, (i) insufficient accounting staff, (ii) inadequate segregation of duties, (iii)
limited checks and balances in processing cash and other transactions, and (iv) the lack of independent directors and independent
audit committee.

The Company is
committed to improving its disclosure controls and procedures and the remediation of identified control weaknesses. As capital
becomes available, Management plans to increase the accounting and financial reporting staff, add independent directors to the
Board of Directors and establish an independent audit committee. We cannot provide assurance that these procedures will be successful
in identifying material errors that may exist in the financial statements, nor can we make assurances that additional material
weaknesses in its internal control over financial reporting will not be identified in the future.

The Company continues
to employ and refine a structure in which critical accounting policies, issues and estimates are identified, and together with
other complex areas, are subject to multiple reviews by accounting personnel. In addition, the Company evaluates and assesses
its internal controls and procedures regarding its financial reporting as necessary and on an on-going basis.

Because of its
inherent limitations, internal control over financial reporting cannot provide absolute assurance of the prevention or detection
of misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Controls Over
Financial Reporting

The Company has no reportable changes
to its internal controls over financial reporting for the period covered by this report.

The Company will
continually enhance and test its internal controls over financial reporting on a continuing basis. Additionally, the Company’s
management, under the control of its Chief Executive Officer and Chief Financial Officer, will increase its review of its disclosure
controls and procedures on an ongoing basis. Finally, the Company plans to designate, in conjunction with its Chief Financial
Officer, individuals responsible for identifying reportable developments and the process for resolving compliance issues related
to them. The Company believes these actions will focus necessary attention and resources in its internal accounting functions.

27

PART II - OTHER
INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On October 14,
2015, the Company was named as a defendant in a case filed in the United States District Court for the District of Delaware case:
Zakeni Limited v. SPYR, Inc., f/k/a Eat at Joe’s., Ltd. The suit relates to the Company’s issuance of two convertible
debentures in the aggregate principal amount of $1,500,000 in 1998. On July 12, 2018, the court approved a Joint Motion for Order
Approving Settlement Agreement. Pursuant to the settlement, the Company will issue 3,500,000 common shares valued at $1,050,000,
warrants to purchase 1,000,000 common shares at $0.25 per share valued at $276,000, warrants to purchase 1,500,000 common shares
at $0.50 per share valued at $398,000, and warrants to purchase 1,000,000 common shares at $0.75 per share valued at $259,000.
The total value of the settlement, $1,983,000 has been recorded as litigation settlement liability on the accompanying consolidated
balance sheets as of June 30, 2018 and December 31, 2017.

On June 18, 2018
the Company was named as a defendant in a case filed in the United States District Court for the Southern District of New York:
Securities and Exchange Commission vs. Joseph A. Fiore, Berkshire Capital Management Co., Inc., and Eat at Joe’s, Ltd. n/k/a
SPYR, Inc. Joseph A. Fiore was the Chairman of our Board of Directors and is a significant shareholder. Mr. Fiore resigned from
his positions as Chairman of the Board and as a Director of the Company effective August 1, 2018. The suit alleges that Mr. Fiore,
during 2013 and 2014, while he was the Company’s Chief Executive Officer, Chief Financial Officer and Chairman of the Board
of Directors, engaged in improper conduct on behalf of the defendants named in the case related to the Company’s sales of
securities in Plandai Biotechnology, Inc. The Commission alleges that Mr. Fiore and the Company unlawfully benefited through the
sales of those securities. The Commission also alleges that from 2013 to 2014, the Company’s primary business was investing
and that it failed to register as an investment company, resulting in an alleged violation of Section 7(a) of the Investment Company
Act of 1940. The suit seeks to disgorge Joseph A. Fiore, Berkshire Capital Management Co., Inc., and the Company of alleged profits
on the sale of the securities and civil fines related to the Company’s failure to register as an investment company with
the Commission.

The Company vehemently
denies any wrongdoing. The allegations demonstrate a fundamental misunderstanding of existing precedent and a mischaracterization
of the facts and transactions at issue, which were not violative of any securities laws, rules or regulations. The Company will
answer these allegations in court.

The Company is
being represented by Alex Spiro, Esq., a partner with the firm of Quinn Emmanuel, Urquhart & Sullivan, LLP and Marc S. Gottlieb,
Esq., a partner with the firm of Ortoli Rosenstadt LLP.

ITEM 1A.

RISK FACTORS

Not applicable to smaller reporting
companies.

ITEM 2.

UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS

During May 2018,
the Company issued 2,000,000 restricted common shares pursuant to stock purchase agreements with third party investors for cash
of $300,000. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b) of Regulation D.

During April, May
and June 2018, the Company issued 1,045,840 restricted common shares pursuant to third party service agreements. These shares
were recorded at fair value of $315,000 in the statement of operations and comprehensive income as part of Professional fees for
the six months ended June 30, 2018. The Company relied upon the Section 4(a)(2) exemption from registration provided by Rule 506(b)
of Regulation D.